E A Blog With A Difference

Today's article is taking a different tack. I am discussing my best investment idea right now-the potential gains and risks. Because today is a light news exception to the glut of information (maybe because there are no more long holidays except in the Islamic world this month), I have the time and space to hold forth.

So I will. Here is my current investment favorite, a stock which dominates its industry whose good results are being discounted because of worries about potential risks which are being overstated.

*A nuclear energy supporter for most of my investing career I now want to help others reach the same conclusion, and also buy into Cameco, CCJ, (CCO in Toronto) a Canadian leader in mining, processing, and managing waste from uranium. The easiest path to carbon cutbacks is nuclear-fueled power production. Offsetting this is fear of radioactivity which insidiously undermines the health of those exposed to it.

But the risk of nuclear disaster has been greatly exaggerated.

On Tuesday, the stock gained 4% and is near a new 12-month and year-to-date high.

Cameco is a stock with more appeal to institutions than retail investors, but turns out to be one of the few ways that you can buy uranium, a market which is run by governments concerned with proliferation, and therefore operating, unlike other commodity markets, being highly regulated. Uranium deposits are mostly found in Australia, Kazakhstan, and Canada, but the only known high-grade deposits are all in Canada. As with other minerals, current production is focused on the highest grade cheapest-extractable ore.

Cameco accounts also for about 16% of all the uranium produced on earth. It has 458 mn lbs of proven and probable uranium reserves. CCJ also has 425 mn libs of measured and indicated resources and 190 mn lib of inferred resources. It is a key intermediary in a controlled market. It also dominates the North American market for components as well as the fuel needed for nuclear power plants. Nukem, a sub of CCJ, is a market intermediary between mines (not just its own) and nuclear electric power plants.

Management

It manages its mines with a discipline to protect its interests while keeping its investment grade rating and value of its reserves and resources. With long-term contracts and using its best margin mines, it can get a realized price of about $50C$A per lib when the spot price is under C$40. Its per lb cost of production is now under $20 since Fukushima.

After the Fukushima disaster in Japan, CCJ cut back on production in Canada and Australia to prevent the market glut. In Nov 2017 it also slashed its dividend and this took down its stock price after a dispute with Tepco (Tokyo Electric Power Co.) discussed below. But of course, if demand picks up the project pipeline will be restarted. Many of the closed mining projects were jv's with other firms like Kintyre with Western Mining and Mitsubishi in Australia. But during the drought in new uranium demand, CCJ bought out its partners and now owns 100% or a controlling share in former jvs like Millennium in Canada and Yeelirrie in Australia.

CCJ current year production will be about 25 mn lbs of uranium from Canada mines Cigar Lake, McArthur River, and Inka although it is licensed to mine 53.4 mn lbs in Canada. Full steam ahead will be slow but sure as 55 nuclear reactors are under construction worldwide over the next decade. Last year only 4 new reactors were connected to the grid.

Its next report will be before the market opens July 26. I suggest buying before then.

Report and Rating

Cameco did not change its 2018 financial outlook, for flat cash flow in 2017. It also switched some purchases from mines it doesn't control to lower its taxes. This is also discussed below, as it is a risk from the corporate strategy. It reports in C$s under International Financial Reporting Standards.

Its most recent quarter produced an upward earnings surprise and what is odd is that analysts covering CCJ failed to raise their valuation or rating. This is because nuclear is a no-no in many countries. One result of this ban is that Charles Schwab brokers now rate Cameco an outperform on pure valuation grounds, leaving aside the politics. It yields over 4% despite the dividend cut last year.

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Disclosure: None.

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Comments

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Vivian Lewis 1 year ago Author's comment

with nuclear energy under a cloud now the only way to invest in uranium is by taking a long-term perspective. And once you do the only company which is a certain long-term winner is Cameco

Michael Molman 2 years ago Contributor's comment

Very interesting analysis on $CCJ. I have been hoping explore the Uranium market as well and this piece has provided some useful information. Personally I believe $CCJ has to long of an investment horizon and that nuclear will inevitably bow to renewables and cheaper natural gas but still very interesting idea.

Bill Johnson 1 year ago Member's comment

Same here. Have any more insights on $CCJ, Vivian or Michael?

Alexis Renault 1 year ago Member's comment